Horrible Trade-offs in a Pandemic: Lockdowns, Transfers, Fiscal Space, and Compliance

Abstract

In this paper, we develop a heterogeneous agent general equilibrium framework to analyze optimal joint policies of a lockdown and transfer payments in times of a pandemic. In our model, the effectiveness of a lockdown in mitigating the pandemic depends on endogenous compliance. A more stringent lockdown deepens the recession which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Lump-sum transfers help mitigate this trade-off. We identify and discuss key trade-offs involved and provide comparative statics for optimal policy. We show that, ceteris paribus, the optimal lockdown is stricter for more severe pandemics and in richer countries. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. We finally discuss distributional consequences and the political economy of fighting a pandemic.

The Younger Age Profile of COVID-19 Deaths in Developing Countries

“…This is consistent with prior research arguing that the virus is likely to spread faster in countries with higher labor informality. Informal workers tend to have less formal schooling, less purchasing power and lower levels of precautionary savings -making them more likely to live hand-to-mouth, and less likely to comply with mobility restriction policies (Alon et al, 2020;Busso et al, 2020;Hausmann and Schetter, 2020). Our work suggests that these risk factors disproportionately affect non-elderly individuals, who are more likely to be economically active.…”

Consumer immobility predicts both macroeconomic contractions and household poverty during COVID-19

“…The predictive power of mobility indices, their real-time availability for a wide range of countries, and their high potential for spatial granularity, imply that they have tremendous potential to inform policy deliberations during the unique uncertainties of the COVID-19 pandemic. Mobility indices are likely to be especially useful in LMICs where there is a paucity of high-frequency data, and could be used more extensively for forecasting models (4), to assess the economic impacts of pandemic-related economic shocks, and to design appropriate economic stimulus and social protection interventions, such as scaling up household cash transfers during lockdowns (10). Real-time mobility data could also speed up policy responses.…”

Macroeconomic effects of COVID‐19: A mid‐term review*

“…Recessions could also have harmful effects on health and mortality, especially in economies with weak social safety nets and limited fiscal resources. These considerations tend to nudge the balance towards the economic objective (see Hausmann & Schetter (2020) and Doerr & Hofmann (2020)).…”